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NUA (Net Unrealized Appreciation) in Holistiplan

This article breaks down the basics of NUA and how to enter it in our Scenario Analysis page.

Normally, any distributions from a 401(k) are taxable as ordinary income. In certain cases; however, employees are allowed to move employer stock from a 401(k) into a taxable brokerage account when they leave that employer. The difference between the cost basis of the shares and the market price is referred to as Net Unrealized Appreciation (NUA), and this amount isn't subject to income tax upon transfer.

Ideally, you can sell the shares after the NUA transaction and pay long-term capital gains rates, which are much lower than the rates on ordinary income. But this doesn't mean the distribution of the employer stock is tax-free: the taxpayer still needs to pay income tax on the cost basis of the shares, which you'll want to include in any projections.


How is this modeled in Scenario Analysis?


The NUA transaction consists of three distinct taxable items:

  1. Cost Basis 
  2. NUA Gain
  3. Post-Distribution Gain


1) Cost Basis:

The cost basis of the shares is reported on Form 1099-R and will be taxed as ordinary income. This is modeled in Holistiplan by entering that basis amount (and the amount reported on the 1099-R) in the "IRA Distributions Worksheet," accessible by clicking the pencil icon circled below.



NOTE: In general, a distribution from a 401(k) will be reported on lines 5a and 5b of Form 1040 as a pension or annuity distribution. However, to account for any early withdrawal penalties that may apply, enter the basis in the "IRA Distributions" line item within Holistiplan.

If the client is under 59.5 years of age, the basis of the shares may not be subject to the 10% early withdrawal penalty, provided that the triggering event for NUA is separation from service and the client is at least age 55 when they leave their employer. Otherwise, the 10% early withdrawal penalty will apply. If the client is exempt from this penalty, check the box seen in the screenshot below.






Enter the basis of the shares in dollars into the "Taxable IRA Distributions" field for the appropriate taxpayer on the return, where the $9,750 figure appears below. Do not use the "Override" data entry box outlined in red below, as you will want to be taxpayer-specific when considering the NUA type event.

 


2) NUA Gain:

The NUA gain is the difference in the fair market value of the company stock and the basis in that stock, as of the date of distribution from the 401(k) plan. This NUA gain is considered a long-term capital gain, and can be entered in the Capital Gains Worksheet, found in the "Schedule D Income" section, by clicking the pencil icon outlined below.



3) Post-Distribution Gain:

This gain measures the difference in fair market value between the date of distribution and the eventual date of sale of the underlying company stock. The post-distribution gain is taxed either as a short-term capital gain or long-term capital gain, depending on the holding period. Like most capital gains, this holding period must be greater than one year to achieve long-term capital gains tax treatment.





NIIT Considerations:

In addition, the NUA gain portion (but NOT the post-distribution gain) is excluded from the 3.8% Net Investment Income Tax (NIIT). To reflect this, include these excluded gains on the line outlined below, within the Form 8960 area of the "Other Taxes" section in Scenario Analysis. More information on NUA and NIIT can be found in the line 5b Instructions for Form 8960 linked here.

Enter any gain as a negative value in this line item, and any loss as a positive value.






For more information on NUA, you may also find this Kitces article helpful: Net Unrealized Appreciation (NUA)

 

If you have any questions on modeling NUA within Holistiplan, please reach out to our Support Team for additional assistance!